Transcript: Joe Davis, Vanguard’s Chief Economist



The transcript from this week’s MIB: Joe Davis, Vanguard’s Chief Economist, is below.

You can stream/download the full conversation, including the podcast extras on iTunesBloombergOvercast, and Stitcher. Our earlier podcasts can all be found at iTunesStitcherOvercast, and Bloomberg.

This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest, his name is Joe Davis, he is the chief economist and global head of investment strategy at the giant $5 trillion Vanguard Group. If you are at all interested in a very nontraditional economic discussion, then you’re going to find this conversation fascinating. We talked about global trade, but not who’s selling what and what tariffs are in the way, we talk about the trade in ideas and the global exchange of technology and how things like the Internet have allowed the entire world to become richer, more productive, lowering certain negative aspects of economic growth, and really helping to raise up the entire world economy and world standard of living.

This is a fascinating want the conversation that I think you’ll find absolutely intriguing.

So with no further ado, my conversation with the Vanguard Group’s Joe Davis.

My special guest this week is Joe Davis, he is a principal at Vanguard and is the firm’s chief economist as well as the Global Head of the Vanguard Investment Strategy Group. He is also a member of the senior portfolio management team for Vanguards Fixed Income Group, Joe Davis welcome to Bloomberg.

JOE DAVIS, CHIEF ECONOMIST, VANGUARD GROUP: Thanks, Barry, throw the beer.

RITHOLTZ: So I’ve been looking forward to having this conversation with you, because there are so many things I want to go over with you about the state of the economy and indexing and Vanguard, tell us how you found your way to Vanguard. It turns out you were born very close to the Vanguard headquarters, is that true?

DAVIS: I grew up literally 10 minutes from Vanguard’s building, I never thought I would end up working at Vanguard, like a lot of things in life, I have my parents to thank for why I’m actually at Vanguard. So I’m coming out a grad school, do my own job search, I’m 31 years old so of course I thought I knew everything.

RITHOLTZ: And you went to grad school…

DAVIS: At Duke…


RITHOLTZ: OK, that’s what I recall.

DAVIS: So I really wanted to go to the private sector not in academia and thought I was going up to New York City to work on the sell side and then my dad pulls me aside, and he says “Hey, have you ever thought about applying to Vanguard?” So of course, again, I’m 31, I say “What? Vanguard that index company? They don’t need an economist.”


And he says “Well, do you mind if I take you your resume and give it to someone over there?” and turns out they were just starting a research group to supplement Jack Bogle who was obviously, continues to be a luminary in the field and I was and so next you know, I’m interviewing at Vanguard it’s 2002 and I was, to this day I was impressed with the talent of the professionals I met at Vanguard with no egos.

And that’s over 15 years ago, Barry.

RITHOLTZ: That’s quite intriguing. So as I was preparing some standard economic questions to talk to you about the Federal Reserve and the yield curve and everybody’s favorite indicators, I came across a conversation that you had recently where your 13 year-old daughter asked you the question, “Hey dad, is the world getting any better?” that’s kind of fascinating from a 13 year-old, but my question for you is what was your answer?

DAVIS: Well, you know, my instinct was it depends and that’s course that’s not, that’s not satisfactory, but the standard economic response, you know my daughter really got me thinking, I remember sitting in the kitchen table, Barry and I said myself you know I should know the answer to this question pretty quickly and I’m going to fail seventh grade, that was a question to a 7th grade essay.

That ended up becoming a hole on a research project because where I zeroed in on is if the world’s getting — if the world is going to get better, that means the rate of innovation, what we call the rate of productivity has to accelerate and why anyone should care about that is because then the standard of living for people around the world is increasing and we — that rate of increase has been you know, declining since 2000, long before the global financial crisis.

And so we stumbled on what is going to lead to higher rates of growth, innovation for a more inclusive growth across the world and something we didn’t expect to find, we actually — we believe we found what potentially is the first leading indicator for innovation that suggests just right now that innovation may — and growth may accelerate 5 to 6 years in the future.

RITHOLTZ: So Steven Pinker, a linguist at Harvard wrote a book “The Better Angels of Our Nature” and his takeaway was well, the headlines are just worse and worse but if you put aside the headlines and actually look at the data, infant mortality, lack of nutrition and starvation, capital crimes, war, all these things have been going down and going down 50 years on a global basis…


RITHOLTZ: Why is it that that is such a challenging question? Why does it not feel like things are getting better when they clearly are getting better everywhere?

DAVIS: And I remember writing off some of the statistics you know to my daughter, you know, Steve’s book, Hans Rosling for years….


DAVIS: Also talked about that, a great example, I think part of it is those are slow-moving trends so we just don’t fixate on them because they’re not moving up and down very quickly.

RITHOLTZ: Those are years and decades.

DAVIS: Yes, years and decades, the other thing is listen, I can’t prove this, Barry, I think part of this is happiness is relative in life, right?

RITHOLTZ: Relative to what?

DAVIS: Well it depends to relative to you know so it’s relative to your peers.

DAVIS: I think you can explain the paradox of so do you have general trends in the world a lot of trends are better, lower violence, increased wealth around the world, look what’s happened in China, yet you have rising income inequality. So that’s where you — I think you can reconcile some of this paradox by saying that’s where the relative matters as much is the absolute.

I don’t — that’s when I justify that position but I think that has been lost sight of but the fact is I think in the financial markets and as investors, we focus more on corporate earnings growth, those economic fundamentals perhaps may fall outside of GDP.

RITHOLTZ: So let’s talk about the productivity issue that you mentioned, so I work in a space where productivity has been exploding…


RITHOLTZ: And so on a relative basis…


RITHOLTZ: To answer — to respond to what you said earlier, it seems to me like productivity growth is booming. Why do we not see productivity growth throughout the whole economy and is that a measurement issue or is it a genuine lack of productivity problem?

DAVIS: Yes, I think that there’s three potential reasons, again we should care because if productivity is really going to return, Bob Gordon’s got that great book “The Rise and Fall of American Growth” and you know other than the late 90s, we haven’t seen a material pick up in productivity and again it feels all around us, Barry, right? I mean technological disruption, innovation, technology, it seems like it should be there.

So one, it could be mismeasured, I don’t buy that argument we’ve looked at some of it, if it’s mismeasured, it’s second order, I mean GDP and those were statistics have always been mismeasured.


DAVIS: And I’ve done a lot of economic historical work to justify that position. Secondly is that it’s were permanently — there are some making the argument some really smart people that I respect, making the argument I mean you hear it in phrases of secular stagnation, you heard of all ideas are harder to come by, that that productivity is permanently impaired, I don’t buy that either.

The third one is I believe that there is an implementation phase that the global economy is working through. Again demographics aside, I’m talking about output per person, income per person, that we will see a material rise in productivity. I can’t tell you the day or the week Barry, but our work, somewhat — we can get into, we call the ideal multiplier we believe is the world’s first leading indicator of commercial innovation that actually will show up on statistics and we believe that that is in the process of occurring. But it’s going to take a little bit of time.

And again, there is an historical analogy to this, in the past two periods in the long US history over 200 years, there was two periods in time at least when productivity is as low as it is today in a period of profound technological disruption, it happened during that the mid-19th century when steam engines and locomotives were expanding across the economy…